Will your non-compete clause actually hold up in court?

by David Gambrill10 Dec 2012

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Will your non-compete clause actually hold up in court?

It sounds straight-forward: one year prohibition on soliciting a company’s clients and two years on doing insurance related business – so why is an insurance broker still operating just six months after leaving his former employer, and taking some clients with him?

Companies in financial services, and possibly those in other industries, wishing to enforce non-compete and non-solicitation agreements against former employees pending a trial are going to face a tougher time of it in light of recent B.C. court decisions, according to Dean Crawford of Heenan Blaikie.

When Hub International took over Redcliffe Investments in March 2011 they hired the former owner’s son, Christopher Redcliffe, under a contract that included a clause banning Hub’s ex-employees from soliciting or doing insurance-related business with clients or prospective clients of Hub or Redcliffe Investments.

Redcliffe resigned from Hub in June 2012, and the court found “there is no serious dispute that Mr Redcliffe has taken on some former accounts of Redcliffe Investments.” However, when Hub asked for an injunction against Redcliffe doing business with its clients, the court refused, saying Hub could not prove that Redcliffe’s actions would cause Hub “irreparable” harm prior to trial.

Redcliffe claimed the clause in the agreement was too broad, and was therefore unenforceable.

Part of the conflict comes from whether the contract includes a non-compete clause, or just a non-solicitation clause. Past cases have found breaking a non-compete agreement is considered “irreparable” because the court can’t calculate business lost as a results of prohibited competition, but the court’s judgment in this case dealt only with the non-solicitation aspect. The court found the harm caused by breaking a non-solicitation agreement can be calculated and therefore the harm before trial is not “irreparable.”

But, writing in competingemployee.com, Crawford noted that “the portion of the covenant preventing the defendant from ‘doing insurance-related business’ with his former employer’s clients is surely a non-compete clause, not a non-solicit provision. A former client could approach the defendant without him soliciting it, yet the defendant would be prevented from doing business with the client. That is a form of a non-compete provision.”

The lesson for employers is to make sure your employee agreements are as clear as possible, to prevent former employees playing with semantics in the court room.

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